New Business Tax System (Consolidation, Value Shifting, Demergers and Other Measures) Act 2002 (90 of 2002)

Schedule 16   Demerger relief

Part 1   CGT relief

Income Tax Assessment Act 1997

1   After Division 124

Insert:

Division 125 - Demerger relief

Table of Subdivisions

Guide to Division 125

125-A Object of this Division

125-B Consequences for owners of interests

125-C Consequences for members of demerger group

125-D Corporate unit trusts and public trading trusts

Guide to Division 125

125-1 What this Division is about

Entities can obtain CGT relief for a demerger.

Owners of ownership interests in the head entity of a demerger group can obtain a roll-over to defer CGT consequences for the CGT events that happen to their interests under the demerger (see Subdivision 125-B).

Capital gains and capital losses made by members of the demerger group from certain CGT events that happen under the demerger are disregarded (see Subdivision 125-C).

Note: Dividend relief is also available: see section 44 of theIncome Tax Assessment Act 1936.

Subdivision 125-A - Object of this Division

Table of sections

125-5 Object of this Division

125-5 Object of this Division

The object of this Division is to facilitate the demerging of entities by ensuring that capital gains tax considerations are not an impediment to restructuring a*business.

Subdivision 125-B - Consequences for owners of interests

Guide to Subdivision 125-B

125-50 Guide to Subdivision 125-B

You can choose to obtain a roll-over if a CGT event happens to your interests in a company or trust because of a demerger of an entity from the group of which the company or trust is the head entity.

There are cost base adjustments if you receive new interests under a demerger and no CGT event happens to your original interests.

Table of sections

Operative provisions

125-55 When a roll-over is available for a demerger

125-60 Meaning of ownership interest and related terms

125-65 Meanings of demerger group , head entity and demerger subsidiary

125-70 Meanings of demerger , demerged entity and demerging entity

125-75 Exception: employee share schemes

125-80 What is the roll-over?

125-85 Cost base adjustments where CGT event happens but no roll-over chosen

125-90 Cost base adjustments where no CGT event

125-95 No other cost base adjustment after demerger

125-100 No further demerger relief in some cases

[This is the end of the Guide.]

Operative provisions

125-55 When a roll-over is available for a demerger

(1) You can choose to obtain a roll-over if:

(a) you own an*ownership interest in a company or trust (your original interest ); and

(b) the company or trust is the*head entity of a*demerger group; and

(c) a*demerger happens to the demerger group; and

(d) under the demerger, a*CGT event happens to your original interest and you*acquire a new or replacement interest (your new interest ) in the*demerged entity.

Note 1: Section 125-80 sets out what the roll-over is.

Note 2: You have to make cost base adjustments even if there is no CGT event: see section 125-90.

Example: Peter owns shares (his original interests) in Company A, a public company. Company B is a wholly owned subsidiary of Company A. Company A announces a demerger utilising a proportionate capital reduction and the disposal of all its shares in Company B to its 320,000 shareholders. Following the demerger all of the shareholders in Company A, including Peter, will own all of the shares in Company B (their new interests).

(2) You cannot choose to obtain a roll-over under this Subdivision for an original interest if:

(a) you are a foreign resident; and

(b) the new interest you*acquire under the*demerger in exchange for that original interest does not have the*necessary connection with Australia just after you acquire it.

Note: Section 136-25 tells you when an asset has the necessary connection with Australia.

125-60 Meaning of ownership interest and related terms

(1) An ownership interest in a company or trust is:

(a) for a company, a*share in the company or an option, right or similar interest issued by the company that gives the owner an entitlement to*acquire a share in the company; and

(b) for a trust, a unit or other interest in the trust or an option, right or similar interest issued by the trustee that gives the owner an entitlement to acquire a unit or other interest in the trust.

(2) However, this Subdivision applies to a*dual listed company voting share in a company as if it were not an ownership interest if there are not more than 5 of those*shares in the company.

(3) A dual listed company voting share is a*share in a company:

(a) issued:

(i) in the*head entity of a*demerger group; and

(ii) as part of a*dual listed company arrangement; and

(iii) mainly for the purpose of ensuring that shareholders of both companies involved in the arrangement vote as a single decision-making body on matters affecting them; and

(b) that does not carry rights to financial entitlements (except the return of the amount paid up on the share and a dividend that is the equivalent of a dividend paid on an ordinary share).

(4) A dual listed company arrangement is an*arrangement under which 2 publicly listed companies, while maintaining their separate legal entity status, shareholdings and listings, align their strategic directions and the economic interests of their respective shareholders through:

(a) the appointment of common (or almost identical) boards of directors; and

(b) management of the operations of the 2 companies on a unified basis; and

(c) the shareholders of both companies voting in effect as a single decision-making body on substantial issues affecting their combined interests; and

(d) equalised distributions to shareholders in accordance with an equalisation ratio applying between the 2 companies, both generally and in the event of a winding up of one or both of the companies; and

(e) cross-guarantees as to, or similar financial support for, each other's substantial obligations or operations, except where the effect of the relevant regulatory requirements prevents those guarantees or that financial support.

(5) However, an arrangement is not a dual listed company arrangement unless one but not both of the companies is an Australian resident.

125-65 Meanings of demerger group , head entity and demerger subsidiary

(1) A demerger group comprises the*head entity of the group and one or more*demerger subsidiaries.

Note: An entity may be a member of one or more demerger groups.

(2) A trust cannot be a member of a demerger group unless*CGT event E4 is capable of applying to all of the units and interests in the trust.

Note: A discretionary trust cannot be a member of a demerger group.

(3) A company or trust is the head entity of a*demerger group if no other member of the group owns*ownership interests in the company or trust.

(4) If apart from this subsection, a company or trust would be the*head entity of a*demerger group and the company or trust, and all of its*demerger subsidiaries, are also demerger subsidiaries of another company or trust in another demerger group, the first-mentioned company or trust is not the head entity of a demerger group.

(5) A company or trust (the first company or trust ) that would, apart from this subsection, be a member of a demerger group is not a member of the demerger group if:

(a) the first company or trust owns, either alone or together with another company or trust that would, apart from this subsection, be a member of the*demerger group, more than 20% but less than 80% of the*ownership interests in a*listed public company or*listed widely held trust; and

(b) the listed public company or listed widely held trust chooses that the first company or trust not be a member of the demerger group.

(6) A company is a demerger subsidiary of another company or a trust that is a member of a*demerger group if the other company or the trust, either alone or together with other members of the group, owns, or has the right to*acquire,*ownership interests in the company that carry between them:

(a) the right to receive more than 20% of any distribution of income or capital by the company; or

(b) the right to exercise, or control the exercise of, more than 20% of the voting power of the company.

(7) A trust is a demerger subsidiary of another trust or a company that is a member of a*demerger group if the other trust or the company, either alone or together with other members of the group, owns, or has the right to*acquire,*ownership interests in the trust that carry between them the right to receive more than 20% of any distribution of income or capital by the trustee.

125-70 Meanings of demerger , demerged entity and demerging entity

(1) A demerger happens to a*demerger group if:

(a) there is a restructuring of the demerger group; and

(b) under the restructuring:

(i) members of the demerger group*dispose of at least 80% of their total*ownership interests in another member of the demerger group to owners of original interests in the*head entity of the demerger group; or

(ii) at least 80% of the total ownership interests of members of the demerger group in another member of the demerger group end and new interests are issued to owners of original interests in the head entity; or

(iii) the demerged entity issues sufficient new ownership interests in itself with the result that owners of original interests in the head entity own at least 80% of the total ownership interests in the demerged entity; or

(iv) some combination of the processes referred to in subparagraphs (i), (ii) and (iii) happens with the effect that members of the demerger group stop owning at least 80% of the total ownership interests owned by members of the demerger group in another member of the group; and

Note: CGT event C2 and CGT event C3 are the only relevant CGT events in a subparagraph (ii) case.

(c) under the restructuring:

(i) a*CGT event happens to an original interest owned by an entity in the head entity of the group and the entity*acquires a new interest and nothing else; or

(ii) no CGT event happens to an original interest owned by an entity in the head entity of the group and the entity acquires a new interest and nothing else; and

(d) the acquisition by entities of new interests happens only because those entities own or owned original interests; and

(e) the new interests acquired are:

(i) if the head entity is a company - ownership interests in a company; or

(ii) if the head entity is a trust - ownership interests in a trust; and

(f) just before the restructuring, it is reasonable for the head entity to assume that more than 50% of original interests in the head entity of the demerger group are owned by:

(i) Australian residents; or

(ii) foreign residents whose new interests have the*necessary connection with Australia just after they acquire them; and

(g) neither the original interests nor the new interests are in a trust that is a*superannuation fund; and

(h) the requirements of subsection (2) are met.

Example: To continue the example from subsection 125-55(1), Peter owns 400 post-CGT shares in Company A. Companies A and B are both members of a demerger group. Company A is the head entity of the demerger group and Company B is a demerger subsidiary.

Company A proceeds to demerge 100% of its shares in Company B to its shareholders.

Company A enters into a proportionate capital reduction, returning 40 cents per share to its ordinary shareholders. Peter is entitled to $160 (40c times 400 shares) under the capital reduction.

For Peter, the capital reduction amount of $160 is compulsorily applied to acquire Company A's shares in Company B, at $6.75 (a discount of 10% to current market value). Company A rounds up the fractional amounts in calculating the number of whole shares to be distributed to each shareholder. This gives Peter 24 shares in Company B (160 divided by 6.75, rounded up to the nearest whole number).

Note: Acquiring new interests by an owner of original interests may include the allocation of the owner's entitlement to new interests to a nominee:

· to sell on the owner's behalf; or

· to hold pending the owner being located.

(2) Each owner (an original owner ) of original interests in the*head entity of the*demerger group must:

(a) *acquire, under the*demerger, the same proportion, or as nearly as practicable the same proportion, of new interests in the*demerged entity as the original owner owned in the head entity just before the demerger; and

(b) just after the demerger, have the same proportionate total*market value of*ownership interests in the head entity and demerged entity as the original owner owned in the head entity just before the demerger.

Note 1: There is an exception: see section 125-75.

Note 2: Dual listed company voting shares are not treated as ownership interests: see section 125-60.

Note 3: Fractional interests will generally not affect your ability to choose a roll-over.

Example: To continue the example from subsection (1), Company A concludes, given the circumstances of the demerger, that the market values of Peter's and the other shareholders' shares in A and B are expected to be in proportion with their original interests in Company A, and advises the shareholders of this position.

(3) In working out whether an original owner complies with subsection (2):

(a) disregard*ownership interests that are original interests the owner owns in the*demerged entity; and

(b) an anticipated reasonable approximation of the*market value of ownership interests is sufficient.

Example: An anticipated reasonable approximation of market values of ownership interests may include:

· valuations provided to shareholders in scheme documents;

· the price selected for use under a sale facility;

and may be made by reference to long-term value.

Exception: off-market buy-backs

(4) A buy-back of*shares that is an off-market purchase for the purposes of Division 16K of Part III of theIncome Tax Assessment Act 1936 is not a*demerger.

Exception: roll-over available under another provision

(5) Circumstances where an owner of original interests can obtain a roll-over under a provision of this Act outside this Division for all of the CGT events that happened to the owner's original interests under the circumstances cannot be a demerger .

Note: An owner might be able to obtain a roll-over for the CGT events under Subdivision 124-E, 124-G, 124-H or 124-M.

Meaning of demerged entity

(6) An entity that is a former member of a*demerger group is a demerged entity if, under a*demerger that happens to the group,*ownership interests in the entity are acquired by:

(a) shareholders in the*head entity of the group; or

(b) unitholders or holders of interests in the head entity of the group.

Meaning of demerging entity

(7) An entity that is a member of a*demerger group just before the*CGT event referred to in section 125-155 happens is a demerging entity if, under a*demerger that happens to the group:

(a) the entity (either alone or together with other members of the demerger group)*dispose of at least 80% of their total*ownership interests in another member of the demerger group to owners of original interests in the*head entity of the demerger group; or

(b) at least 80% of the total ownership interests of that entity and of other members of the demerger group in another member of the demerger group end and new interests are issued to owners of original interests in the head entity; or

Note: CGT event C2 and CGT event C3 are the only relevant CGT events.

(c) the demerged entity issues sufficient new ownership interests in itself with the result that owners of original interests in the head entity own at least 80% of the total ownership interests in the demerged entity; or

(d) some combination of the processes referred to in paragraphs (a), (b) and (c) happens with the effect that members of the demerger group stop owning at least 80% of the total ownership interests owned by members of the demerger group in another member of the group.

125-75 Exceptions to subsection 125-70(2)

Employee share schemes

(1) In working out whether the requirements in subsection 125-70(2) are met, disregard each of the*ownership interests described in subsections (2) and (3) if, just before the*demerger, those interests (taking into account either or both of their number and value) represented not more than 3% of the total*ownership interests in the entity.

(2) An*ownership interest in a company that is owned by an entity is disregarded under subsection (1) if the ownership interest:

(a) is:

(i) a*qualifying share or a*qualifying right*acquired under an*employee share scheme; or

(ii) a*share acquired under a*scheme to which section 26AAC of theIncome Tax Assessment Act 1936 applies; and

(b) is not a fully-paid ordinary share.

(3) An*ownership interest in a trust that is owned by an entity is disregarded under subsection (1) if the ownership interest:

(a) would be a*qualifying share or a*qualifying right*acquired under an*employee share scheme if Division 13A of Part III of theIncome Tax Assessment Act 1936 applied to ownership interests in a trust; and

(b) is not a fully-paid unit.

Adjusting instruments

(4) In working out whether the requirements in subsection 125-70(2) are met, disregard each of the*ownership interests described in subsection (5) ( adjusting instruments ) if, just before the*demerger, those interests represented not more than 10%, or such greater percentage (not exceeding 17%) as is prescribed, of the ownership interests in the entity.

(5) An*ownership interest in a*listed public company or a*listed widely held trust that is the*head entity of a*demerger group is disregarded under subsection (4) if:

(a) the adjusting instrument was issued on terms that ensure that its value is not adversely affected by an*arrangement undertaken by the company or trust in relation to other ownership interests in the company or trust; and

(b) if the adjusting instrument can be converted into an ordinary*share in the company or an ordinary unit in the trust, any conversion will occur on a basis:

(i) that is set out in the terms of the issue of the instrument; and

(ii) that is adjusted to take into account a capital reduction or a capital reconstruction; and

(c) before conversion, the owner of the adjusting instrument does not have a right to participate in distributions of profit or capital except as set out in the terms of the issue of the instrument; and

(d) the adjusting instrument deals with the effect of a*demerger that happens to the demerger group on the value of the instrument.

Example: Some examples of adjusting instruments are:

· convertible preference shares, including reset preference shares;

· convertible notes;

· partly paid shares where the paid-up amount is adjusted to reflect a capital reduction.

Additional exceptions

(6) The regulations may provide that, in working out whether the requirements in subsection 125-70(2) are met, other*ownership interests of a kind specified in the regulations are to be disregarded if, just before the*demerger, those interests represented not more than a prescribed percentage of the ownership interests in the entity.

(7) However, the total percentage of*ownership interests to be disregarded under this section must not exceed 20% of the ownership interests in the entity.

125-80 What is the roll-over?

(1) If you choose the roll-over, a*capital gain or*capital loss you make from a*CGT event happening under the*demerger to an original interest you own is disregarded.

(2) If you choose the roll-over, the first element of the*cost base and*reduced cost base of:

(a) each new interest that you are not taken to have*acquired before 20 September 1985; and

(b) if not all of your original interests ended under the*demerger - each of your remaining original interests that you acquired on or after 20 September 1985;

is such proportion of the sum of the cost bases of all your original interests that you acquired on or after 20 September 1985 (worked out just before the demerger) as is reasonable having regard to the matters specified in subsection (3).

Note 1: These rules replace the cost base and reduced cost base adjustments in CGT event E4 and CGT event G1.

Note 2: The head entity or the demerging entity may advise you of the proportions.

(3) The matters are:

(a) the*market values of your remaining original interests just after the*demerger, or an anticipated reasonable approximation of those market values; and

(b) the market values of your new interests just after the demerger, or an anticipated reasonable approximation of those market values.

Example: To continue the example from subsection 125-70(2), Company A advises its shareholders that Company B at that time represents 5% of the market value of the group as a whole. Peter's cost base for each of his shares in A is $4.60, and Peter recalculates his cost base as follows:

Total cost base = $1840 = (4.60 * 400 shares)

to be spread over 400 shares in A and 24 shares in B.

5% of 1840 = 92

(92 / 24 shares) = $3.83 per B share

1840 - 92 = 1748

1748 / 400 = 4.36 per A share

Pre-CGT interests

(4) The following subsections apply if you choose the roll-over and you*acquired some or all of your original interests before 20 September 1985.

(5) If you*acquired all of your original interests before 20 September 1985, you are taken to have acquired all of your new interests before that day.

(6) If you*acquired some of your original interests before 20 September 1985, you are taken to have acquired a reasonable whole number of your new interests before that day having regard to:

(a) the*market values of your original interests and your remaining original interests just after the*demerger, or an anticipated reasonable approximation of those market values; and

(b) the market values of your new interests just after the demerger, or an anticipated reasonable approximation of those market values.

(7) If a proportion, but not all of, your original interests ends under the*demerger and you*acquired some of your original interests before 20 September 1985, that same proportion of those interests you acquired before that day ends.

Note: CGT event K6 may be relevant if you later dispose your interests that are treated as being pre-CGT.

Example: Bert owned 100 shares in a company of which 50 were acquired pre-CGT. Under a demerger 20 of Bert's 100 shares were cancelled in exchange for new interests. As 20% of his shares were cancelled, 10 of his pre-CGT shares are taken to have been cancelled.

(8) If you choose a roll-over for some but not all of your original interests, you apply the rules in this section as if your original interests for which you chose the roll-over were your only original interests.

125-85 Cost base adjustments where CGT event happens but no roll-over chosen

(1) You must adjust the*cost base and*reduced cost base of an*ownership interest you own in a company or trust if:

(a) a*demerger happens to a*demerger group of which the company or trust is a member; and

(b) you owned an original interest in the*head entity of the demerger group just before the demerger; and

(c) a*CGT event happens to the original interest and you*acquire a new interest under the demerger; and

(d) you do not choose a roll-over under this Subdivision for the original interest.

(2) The adjustments you must make are the same as the adjustments you would have to make under section 125-80 for the*cost bases and*reduced cost bases of the remaining original interests and new interests just after the*CGT event if you could have chosen a roll-over under this Subdivision for the*demerger and you had done so.

125-90 Cost base adjustments where no CGT event

(1) You must adjust the*cost base and*reduced cost base of an*ownership interest you own in a company or trust if:

(a) a*demerger happens to a*demerger group of which the company or trust is a member; and

(b) you owned an original interest in the*head entity of the demerger group just before the demerger; and

(c) no*CGT event happens to the original interest, but you*acquire a new interest under the demerger.

(2) The adjustments you must make are the same as the adjustments you would have to make under section 125-80 if you could have chosen a roll-over under this Subdivision for the*demerger and you had done so.

125-95 No other cost base adjustment after demerger

If you have to make adjustments to the*cost base and*reduced cost base of your*ownership interests under section 125-80, 125-85 or 125-90 because of a*demerger, no other adjustment can be made under this Act to those cost bases and reduced cost bases because of something that happens under the demerger.

Note: Those sections deal with any value shift that might occur under the demerger and avoid the need for the general value shifting regime to apply.

125-100 No further demerger relief in some cases

This Division does not apply to the remaining*ownership interests in a*demerged entity if one or more members of the*demerger group*disposed of or cancelled less than 100% of the total ownership interests of that group in the demerged entity.

Note: After the demerger, a former member of the demerger group can undertake a further demerger to which this Division can apply.

Subdivision 125-C - Consequences for members of demerger group

Guide to Subdivision 125-C

125-150 Guide to Subdivision 125-C

Certain capital gains and capital losses that members of a demerger group make under a demerger are disregarded.

Certain capital losses made under a demerger are reduced where the demerger results in a value shift.

Table of sections

Operative provisions

125-155 Certain capital gains or losses disregarded for demerging entity

125-160 No CGT event J1

125-165 Adjusted capital loss for value shift under a demerger

125-170 Reduced cost base reduction if demerger asset subject to roll-over

[This is the end of the Guide.]

Operative provisions

125-155 Certain capital gains or losses disregarded for demerging entity

Any*capital gain or*capital loss a*demerging entity makes from*CGT event A1,*CGT event C2,*CGT event C3 or*CGT event K6 happening to its*ownership interests in a*demerged entity under a*demerger is disregarded.

Note 1: The full list of CGT events is in section 104-5.

Note 2: This section will not apply if section 125-100 applies.

125-160 No CGT event J1

*CGT event J1 does not happen to a*demerged entity or a member of a*demerger group under a*demerger.

125-165 Adjusted capital loss for value shift under a demerger

A*capital loss made by an entity that was a member of a*demerger group from a*CGT event happening to a*CGT asset under a*demerger or after a demerger is reduced to the extent that the capital loss is reasonably attributable to a reduction in the*market value of the asset because of the demerger.

Example: The market value of equity or loan interests in the demerging entity may be reduced by the disposal, for inadequate value, of ownership interests of another member of the demerger group to owners of original interests in the head entity of the group.

125-170 Reduced cost base reduction if demerger asset subject to roll-over

(1) The*reduced cost base of a*CGT asset is reduced if:

(a) the*market value of the asset is reduced because of a*demerger; and

(b) after the demerger the asset is*acquired by an entity from another entity (the transferor ) in a situation where the transferor obtained a roll-over for the disposal; and

(c) the reduction occurred when the transferor owned the asset.

(2) The*reduced cost base of the asset as determined under the roll-over is reduced just after the roll-over to the extent of the reduction in*market value caused by the*demerger.

Note: The rules in section 125-165 and this section deal with any value shift that might occur under the demerger and avoid the need for the general value shifting regime to apply.

(3) If the*reduced cost base of a*CGT asset is reduced under this section because of a*demerger, no other adjustment can be made under this Act to that reduced cost base because of something that happens under the demerger.

Subdivision 125-D - Corporate unit trusts and public trading trusts

Guide to Subdivision 125-D

125-225 Guide to Subdivision 125-D

This Division applies to corporate unit trusts and public trading trusts as if they were companies.

Table of sections

Operative provisions

125-230 Application of Division to corporate unit trusts and public trading trusts

[This is the end of the Guide.]

Operative provisions

125-230 Application of Division to corporate unit trusts and public trading trusts

This Division applies to a trust to which section 102K or 102S of theIncome Tax Assessment Act 1936 applies for an income year in which a*demerger happens as if:

(a) the trust were a company; and

(b) *ownership interests in it were interests in a company.


Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).